Employees Rarely Understand Their Employer’s Pay Policy

Unexplained pay strategy leads employees to doubt they’re being compensated fairly

By Stephen Miller, CEBS Sep 26, 2016
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More than 9 in 10 companies have a compensation policy, but fewer than half of surveyed companies believe their employees understand it.

"With pay transparency in the news, it is surprising to see the large percentage of companies whose employees are either not familiar with their organization's compensation policy or have minimal understanding of it," said Kerry Chou, CCP, senior practice leader at WorldatWork in Scottsdale, Ariz. Chou's organization, an association of total rewards professionals mainly at large North American companies, sponsored the survey, which was sent to 5,404 of the association's members in May and June, with a 12 percent response rate. The research was underwritten by consultancy Aon Hewitt.

The resulting Compensation Programs and Practice Survey report shows that employees' understanding of their company's compensation philosophy continues to be low, with the percentage of respondents who believe that either most or virtually all of their employees understand the organization's pay policy falling from 28 percent to 22 percent since 2014.

"To what extent do employees understand the company's compensation philosophy?"

  2014 2016
Virtually no employees understand it.7%11%
Most do not understand it.38%48%
About half of employees understand it.26%27%
Most employees understand it.27%19%
Virtually all employees understand it.1%3%
Source: WorldatWork's 2016 Compensation Programs and Practice Survey.

The falloff in understanding about compensation has occurred as more employers share only minimal information about how pay is determined.

"How much information is shared with employees about their individual salaries?" 
(respondents selected all that apply)

2014 2016
Minimal pay-related information39%46%
Information regarding the design of the pay program (e.g., strategy, compensation markets, link to performance) 44%41%
Base salary range for the employee's pay grade44%37%
Base salary range for all pay grades or jobs16%15%
Actual pay levels for all employees4%4%
Source: WorldatWork's 2016 Compensation Programs and Practice Survey.

The decrease in communications about pay "might be in response to the mistaken belief that with little change in salary increase budgets, additional communication is unnecessary," Chou suggested. The lack of significant pay increases "may create the mistaken impression that employees have enough information when, in fact, the opposite may be the case."

The Manager's Role

When information about the pay program is communicated to employees, it is most often through individual discussion with supervisors, said 81 percent of respondents. Typically, these conversations occur annually and are approached through brief written communications (59 percent) or brief verbal communication (58 percent).

At 13 percent of organizations, no guidance is provided to managers on setting pay other than the overall budget figure, the survey found. Additionally, 44 percent of respondents said their organization publishes a merit matrix that managers can use as a guide, but individual managers also have the choice to deviate from the matrix.

Honing the Message

"Companies are rating themselves fairly low on the scale of quality and effectiveness with respect to pay communications," said Sharon Podstupka, a principal at pay consultancy Pearl Meyer and Partners in New York City, in a video interview posted by WorldatWork. "We've seen compensation managers who know the technical details of their pay plans [but] the translation isn't coming through to the participants," she noted.

A common mistake, Podstupka pointed out, is "not getting the right team of people together from the onset to agree on key messages about the program," such as emphasizing the link between performance and rewards, and clarifying opportunities for compensation growth. The next step, she advised, is agreeing on how to translate these messages into conversations with employees "so they can walk away feeling that the program has value."

An advantage of having managers engage in pay conversations with their direct reports is that "employees really do connect better with their people managers as opposed to a corporate compensation function," she said. But "a challenge for managers who are not HR people is that they sometimes don't speak the language of compensation." HR, therefore, has an important role in providing managers with "the right 'elevator speech,' so they can have those meaningful conversations with their employees."

With executives, too, "that leadership voice is very important, and having your leaders understand their role in communicating the value of pay and total rewards in general, and what it means to the business and to [employees'] personal wealth-creation, is important."

Clear Content, Effective Delivery

Along similar lines, pay communications specialists at Sibson Consulting, headquartered in New York City, shared with WorldatWork these points to keep in mind when delivering compensation information:

  • Keep it simple. Complicated compensation communications are an expensive way to make an organization's workforce feel dissatisfied, so present information in a straightforward manner using language that non-HR people can understand. For instance, "when a company communicated that it was paying at the 75th percentile without including clarifying language, some employees concluded that they were being paid 75 percent of the market," the consultants pointed out.

  • Make it personal. Use customized, targeted information, such as total compensation statements, to illustrate the personal value of rewards. Additionally, use a range of media to reach managers and employees. For example, "online employee newsletters can include top management interviews about the company's compensation philosophy and how the pay program works," they said.

  • Continue the conversation. Compensation communications should not be a once-a-year event. "When communicating to employees about quarterly financial and operations results," they consultants advised, "explain what the numbers mean from a pay perspective. Moreover, management training should emphasize the importance of ongoing pay conversations and provide suggested content.

Related SHRM Article:

How to Counter Employee Perceptions of Income Inequality, HR Magazine, May 2016

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